Danielle DiMartino Booth with Kitco News — Credit Stress Is Here. Where to hide?

Give it up for Danielle D. [music] Martino. >> Daniel D. Martino. >> Daniel D Martino. Boo. >> And I'm not a Wall Street newsletter. Um, part of the independence of the Federal Reserve is we stay in our lane. Independence is a two-way street. We let people that do trade policy and fiscal policy stay in their lane, too. That's how we can stand up here and call them the way we see them. >> All right. Welcome back. I'm Jeremy Saffron. That was Kevin Worsh from the podium today. He was asked what he'd say to investors who see the president's threat to cut off trade over interest rates as a test on the Fed's independence. He had just raised them a quarter point to a range of 3 and 3/4 to 4%, the first increase in 3 years, and not one person voted against it. 7 weeks ago, three officials dissented because they wanted a hike and were overruled. Today, no one's argued for waiting. Now, that statement gives one sentence of reason. a timelier return to 2%. Inflation has obviously been above that target for 5 and a half years, and their own projections don't get back there until 2029. Now, Wars didn't call today tightening. He said that the Fed removed a dose of accommodation. 12 officials wanted to go again this year. Four wanted to go twice. Danielle D. Martino Booth joining us after this. All right, Danielle. Obviously, you [music] were inside that building. your desk had this meeting on paper before the statement hit. Uh it came back 12 to nothing and in June half of that committee wanted a hold or a cut. So what happens in a room over one summer that moves people that far. Well, I I think um I think that that Kevin Worsh in providing let's get real in providing forward guidance at Jackson Hole revealed his hand that despite the fact that he's got an inflation task force to look to potentially new and different ways to gauge inflation, he decided to to hook his his his cabin, excuse me, hook hook his train right behind core PCE at Jackson Hole. um we anticipate that that is going to stay hotter than what uh certainly well above the 2% inflation target. So he revealed his hand in Jackson Hole and I think that that was what set up today's unanimous vote on the Federal Open Market Committee calling for this 25 basis point rate hike. The fact that he characterized it though Jeremy as you said as a dose of accommodation I think that that is what really scared market participants. Remember he does not provide a dot on the dot plot but he kind of gave investors one by saying it was just a dose. >> Now then was today's data was you know was it a data decision or or a credibility payment on that promise he had already made over Jackson Hole. >> I think it was much more credibility. He was I this was a 29minute press conference. This this set a world land speed record for the the absolute quickest post FOMC presser that we've ever seen. Almost all questions that reporters asked him were answered by no or I'm not going to answer the question. Um but he you know he did express reservations about the potential for for high energy costs to spill through to broader gauges of inflation. And right after the meeting when we saw the initial dot plot, the chances of an October rate hike kind of slip down underneath 40%. As we're watching markets close there, they're north of 50%. Would war embark on a suicide mission 6 days before the US midterm election and actually raise rates again on October the 28th? We don't know because he left us hanging. >> Yeah. you you Worsh was was kind of asked point blank whether the market led him here. You know, he said that the Fed has an enormous amount of power and that these decisions that we make, do do you believe him? >> I don't think that he would have um sadly no. No. My my short answer is no. with with a a north of 90% chance of a rate hike being priced into the markets. I think that we could possibly interpret that as being um kind of a unanimous front on the committee. But he did say in in answer to the question, no, it was not the markets that caused us to make this decision today. It's because the data that's come in in the seven weeks since we've met suggested that that was the right path to take, not what markets were dictating. You know, he also said that he's he'd be hardressed to call financial rest conditions restrictive and that his colleagues kind of broadly agreed. So, if they don't think this is even restrictive yet, I mean, how how much more is coming? >> Well, it's it's interesting you asked that question because according to the dot plot, there's only one more rate hike coming this year and none in 2027. In fact, there are four members of the committee who indicated for 2027 that they would be advocating for rate cuts next year. Uh, you know, Wars referred to trend, the word trend. I don't know how many times, but between now and presumably the December FOMC meeting, if he does not raise, if if rates are not raised in October, which would shock me again, 6 days before the US midterm election, >> but if if that's not the case, and we are waiting until December, we have not one, not two, but three payroll reports >> that are coming out between now and that December FOMC. >> Now, you you called that August inflation print kind of noise. We've talked about it before. I mean, telecom and Airbnb fee change, you know, but important import prices, I mean, came in at seven on the year, five and a half, even stripping out retail. So, retail sales rose 1.2%. That isn't noise. Which number did they hike on? >> I don't think they hiked on retail sales because any economist can do an inflation adjustment. >> And when you look at the trends in in real retail spending, they're not what they need to be. We're seeing unit um sales come down and we're seeing nominal sales, which is how retail sales are reported. They're not reported adjusted for inflation. So, we are seeing those nominal sales rise, but it's not because Americans are buying more things. It's not because Americans are buying more services. United Airlines and American Airlines today just announced that they were going to be pulling capacity out of the system, fewer flights. Uh and that is in reaction to the fact that they're selling fewer airline tickets and getting the money off of purely priced, purely people who are paying for those full fair business class seats and that's what's going to cause them to pull capacity out of the system because quote unquote they're in the business of making profits. >> You know, I guess Worsh is isn't really looking at the headlines at all. I mean, he's counting how many price categories are still running above that 3%. Corn inflation just printed 2.4 year-over-year, the lowest since 2021. I was reading this Nat Nexus report. They called that hiking into disinflation. So, who has the right thermometer? Well, if you listen to what Worse is saying, and we've seen the percentage of inputs to inflation that are rising above 3% on any given month fall below that 50% threshold, which we just saw with the most recent inflation report, which was different than what the case was with the data that he had in hand at Jackson Hole, then you would say that core inflation is going in the right direction. Um but again he made mention today of the risk of of of pass through pricing because of higher oil prices. Jeremy the one thing I can say with certainty given the market's reaction right now is that the one occupant of the White House is not happy with the result of today's FOMC meeting. He would might have taken the 25 basis point rate hike. Might have hoped that it was a oneanddone but he will not take down days in the market. H you know it's an interesting one too because we have to talk about kind of what it lands at. I want to get to the defaults but the White House wanted lower rates. There's no question there. I mean obviously these this raise unanimously then told trade and fiscal policies kind of stay in their lane. So was that aimed at defending that institution or kind of the warning uh directly? I I think it came across as a warning and it's not so much the trade policy portion because I think that I think that ramping up the trade war this close to the midterms is going to be a non-starter um at least for most of the GOP, most of the incumbents who are worried about losing their seats. But I would not say the same thing applied to fiscal policy. He's referring I think at least the markets are interpreting his referring to Treasury Secretary Scott Bessant trying to trying to control rates at the long end of the curve and saying that remember two meetings ago he said that he was uh independent of what was going on at the Treasury Department but interested in it. I think today he said he wasn't so much interested in it after all and that was kind of when the bond market fell out of bed. Hey, does does that 12 to to nothing vote protect WSH from any political backlash that comes next? >> I certainly think that it protects him on the committee, >> right? >> But I don't think that it protects him from political backlash. Again, characterizing financial conditions as accommodative. That's in the eye of the beholder. I keep repeating myself till I'm blue in the face. US small business bankruptcies, Jeremy, are up 64% yearover-year through August. I doubt that most small business owners who are choking under high interest rates would consider financial conditions to be accommodative right now. >> Yeah. I mean, Fitch, to your point, just says that private credit defaults just hit its record 6.3%. I mean, 45% of August events for stress maturity extensions. Nearly half the defaults over the last year involved borrowers who stopped paying cash interest altogether. I mean, are are are lenders resolving this, Danielle, or are they just changing the terms so that they don't have to recognize it yet? >> They are changing the terms because companies cannot afford to refinance at these prohibitively high rates. So, they're finding a way to do a payment in kind. That's what you're referring to, pick uh payments where they're not paying you cash interest. They're just tacking it on to the end of the bill. But to to Fitch's point of of the highest private credit default rate that we've seen, 6.3%. Again, clearly there are certain areas of the US economy that do not feel that that policy right now is accommodative. >> Yeah. Yeah. And I guess we should just for some at home too, I mean, for people who don't live in the credit markets, just translate that. I mean, what does a stressed maturity extension extension actually look like from inside a company? Well, from inside a company, all they're doing is buying time. And whether you talk about S&P, Moody's or Fitch, they've all come out with different reports that say when companies take these stop gap measures, more often than not, they eventually land in bankruptcy. So, it's it's just just buying time. But how much time can you buy when the 10-year benchmark Treasury is sitting at 5% again today after trading as low as 4.94% on hopes that whatever came out of the FOMC meeting today would be appreciably more dovish than what markets got. >> Yeah. Yeah. It's interesting too. I mean where is that accommodation actually showing up? I mean healthcare uh industrial manufacturing borrowers are defaulting 9.9%. Software is at6. Meanwhile, the Fed calls household spending resilient. I mean, you saw today capital investment robust and lowered its unemployment forecast to 4.1%. So, are private credit in in the Federal Reserve just looking at two completely different American economies here? >> Well, clearly they are. And the Federal Reserve is also looking at a different economy than most US retailers. US retailers have been saying to us unequivocally whether it's Dollar General or Home Depot, we are not able to pass through price increases to the extent that there are higher input costs which undeniably if you look at the cost of freight or if you look look at the cost of energy prices or or the cost of diesel fuel specifically uh companies are taking it straight to their bottom line if they're not able to pass through those higher input costs to end consumers. And that is simply what we are hearing when a company like Dollar General says even our high-end even our high-end uh consumers who've seged over to a Dollar General even they're spending less than they were before. Again, retail sales are measured on a nominal basis, but unit sales are falling. >> And I mean, to your point, if if retailers can't pass those higher costs to consumers, then inflation doesn't disappear. It just moves into margins. So, I mean, does today's hike turn an inflation problem into an earnings problem, a layoff problem, a default problem? >> You just went through the entire cycle, Jeremy. You just you you just that is how this works. To the extent that company's margins get squeezed, they eventually manifest as layoffs because companies will cut costs. Come hell or high water, they will cut costs. >> Now, Worsh listed quite a few times today, geopolitics is one of the three reasons they moved today. His words were that there were no hiding from hot spots around the world and the Fed's judgment about the situation has changed. So if part of this hike is a response to a war driving up oil, I mean, what does a 25 basis point do to a barrel? And and what does it do to a household that Moody's already, you know, has down $1760 since this started? >> No, it does absolutely nothing for a household, if anything, because we're going to see an instantaneous reaction in credit card borrowing rates. We're going to see an instantaneous reaction for the millions of Americans who have taken home equity out of their homes and taken a higher mortgage rate along the way in order to do that. 57% of Americans who took cash out refinancing in the second quarter accepted a higher mortgage rate. That just means that the rate that they're paying on the money that they took out is going to increase. The rate that they're paying on their credit card debt, which is untenable, is going to increase. is going to be that much more difficult to get an auto loan where we now consider the new norm to be 102-month term. >> War said that that 10year is high because of the economy was strong. I don't know if you heard that. I mean Scott Bessant obviously told Congress that the deficit is that yield um or is in that yield I should say. So I mean who who's pricing the most important asset in the world correctly right now? >> It's hard to say. You could say that bond the bond market is doing its job. You could also say that the biggest investors in the market uh are profiting from being positioned in order to make money if bond yields rise. >> So nothing is quite as neat as what is being painted and portrayed given the speculative positioning that we're seeing with some of the largest hedge funds in the United States and in the world for that matter. Now, take this out of the data just for a second, Danielle, because I know it's been a crazy day for you, and I know that you're over in Manhattan, but what does today's, you know, kind of rate hike, I guess, look like on on Main Street over the next six months? Is it fewer hours? Is it fewer hires, store closures, simply just higher prices? >> We're already seeing that. We've seen more than 200 companies close on any given month for 5 months running now. We are seeing slow uh small businesses um close. We are seeing hours being cut. And I think we're going to see continuation of that. Again, we're not seeing West Texas Intermediate dip below $100 a barrel. Energy costs are prohibitively high. We're seeing data centers um continue to increase households, utility bills. Um so, it's one blow after another for Americans who are increasingly dependent on debt that is getting more expensive. >> Yeah. You know, small businesses, because I know you talked to them. I mean, who feels today's hike first? Is it is it that consumer already carrying the balance or is it those small businesses that can't raise prices and I guess now has to refinance >> if they can Jeremy [clears throat] if they can I just mentioned that small business bankruptcies are up 60 64% year-over-year in many cases they cannot >> refinance and the only solution is to declare bankruptcy or to close the doors. So, um, again, you know, clearly I'm over excited or overstimulated after quite a day in the media and it being Fed day. Uh, but the Federal Reserve is supposed to be making monetary policy on behalf not just of the largest corporate borrowers, but on behalf of all Americans and small businesses. And that's certainly not what happened today. >> Yeah. Yeah. So, I mean, the Fed is is obviously tightening into a margin squeeze. We talked about that private credit squar uh stress. Try saying that 10 times. So, I mean, you know, it sounds the household's already under pressure and it does sound like that long-term case for gold, you know, is there yet it just reversed more than $130. I mean, is the market selling the hedge before it needs it? >> Possibly. Again, we're going to have to see followthrough to core inflation, which we're not seeing, in order to justify subsequent further rate hikes going forward. I think this is probably something of a quick reaction. U bear in mind when stocks fall sometimes there those those margin calls hit and sometimes you sell what you've got the closest to you. But going back to your your comment and your observation and Fitch's observation about stress in private credit >> whenever there is stress in the credit markets and we're certainly seeing that not just with small business bankruptcies but according to bank bankruptcy watch fast rising commercial larger company bankruptcies obviously private credit defaults are going up. Whenever you see stress in the credit markets, the only place that you can hide with any certainty, especially when interest rates are as high as they are is precious metals. >> Yeah, it's going to be interesting. I mean, we'll watch it. It took a little dip. I can see it a little bit of resilience here. Uh October 2nd, I got to talk to you. I mean, the jobs revision. What number kind of tells you your argument was right, and what number tells you the Feds was? >> Well, you know, we'll have to wait and see. I mean, the idea that the month after the World Cup there were 59,000 restaurant and bar workers hired is absolutely ludicrous. The seasonal adjustments going on right now at the Bureau of Labor Statistics are clearly broken. It's not what we're seeing from job postings. It's not what we're seeing from paychecks uh with with two months in a row of of declining small business openings. It's not what the National Federation of Independent Business is suggesting and it's not what ADP is communicating either. So if there's a standout, if there's an outlier, that outlier tends to get corrected. >> If if that seasonal adjustment kind of is producing that labor market, um which real-time measure do you kind of trust when you're looking at that data? >> Well, you know what, Jeremy, I listen to what US households are saying. I listen to the New York Fed uh saying that Americans perceptions of the job market have deteriorated marketkedly. I don't look at Republican or Democratic responses to the University of Michigan, but I sure do look at those of independents who see higher unemployment expectations increasing as a factor of time. Again, there's a task force for alternative data sets. I sure do wish that Worsh would begin to tell us what some of their conclusions are because it's clear that the official data are at best misleading. >> You know, it's interesting between now and the the December meeting. I mean, what breaks first if the Fed has made a mistake, do you think? I mean, what are you looking for? Are you looking at the labor, the consumer, private credit, the market itself? >> Well, the market itself would certainly be the biggest thing to break because we have seen consumer sentiment among high income earners begin to come down. They're nervous with all of the girrations in the market. And if the top of the K stops spending or even if the top of the K slows its spending, Katie bar the door because they're what they're the individuals who've been holding up the entire US economy. And that I think is what's critical is what happens in markets and the trickle down effect to wealth and what high netw worth individuals in the United States are willing to spend. I think that that's what's important here and that's what we have to pay attention to. Even though we know that the US economy is not the market when wealth and spending and consumption are as concentrated as they are right now in the hands of the few. What matters in markets matters for the economy. >> Yeah, you know, it's it's just wild to watch. I got to see what happens with this uh Treasury market too as we continue to watch. uh every quarter point the Fed adds shows up in the federal interest bill which is already has that record of 18.5 billion of of revenue or 18.5% rather of revenue. >> Does fighting inflation with rates make the bond market other problems worse? >> Well, it certainly does make the bill higher for Uncle Sam, especially since the US government is borrowing closer to the Treasury bill rate than it is to the 30-year long bond. Um, you know, that that was something that that that that Bessant criticized when Janet Yellen was doing it. And yet here we are. Here we find ourselves today borrowing at the very short end of the curve, which is definitely directly impacted by Fed policy. >> Yeah. All right, Danielle, busy day for you. I think I saw you running around Manhattan trying to make all the news networks. So, thanks for making the time over here at Kco News. We appreciate it. >> Absolutely. Thank you for having me. >> All right, that was Danielle D. Martino Booth, of course, founder of Qi Research. Worth reading as well. I mean, been been incredibly accurate through all of this with the Fed. Uh, thanks again for your time. Now, two documents landed this week describing the same country. One of them is the Federal Reserves. It says household spending is resilient, capital investment is robust, and the job market is strong enough that they lowered the unemployment forecast. And the other one is is fitious. I mean, it says private credit defaults just hit the highest level on record. Nobody has been lying for both of those to be true. They're describing very different people, though. Now, what today settled is the committee had stopped waiting to find out which one is the trend. 12 out of them want to move again before Christmas. Four want to make a move twice. And their own projections don't put inflation back to target until 2029. The honest read is October 2nd. You just heard exactly what Danielle will be watching for in it. I'm Jeremy Saffron. Thanks again for all of us here at Kiko [music] News. Thanks for watching. Got great content coming up all week long. We'll see you soon. [music] Heat. Heat. [music] [music]